People Must Stop Believing in the Free Market Fairies

Posted by Heroesall, Unstuffed at 8:53 AM on February 8, 2009.

Even now, with the world economy swirling down the S-bend, we hear some hardy souls claiming that ‘the free market will fix it’.

Sadly for us, the free market fairies are unlikely to flit along and clean up our mess while we sleep. Why not? Well, I hate to break it to you, but they don’t exist.

That’s not, as the free market fundamentalists like to claim, because we regulate too much. It’s because the free market theory is based on some wacky assumptions – if those assumptions aren’t true, then the whole theory crashes to the ground.

Two of these assumptions are that:

• People have perfect knowledge of the value of what they’re buying or selling
• People never base buying or selling decisions based on what other people are doing.

If I ever find a trader working like that, I’ll notify the media. Clearly, if this were true, there’d be no such thing as bubbles or stock runs. In fact, the financial system is more like soccer – someone makes up the rules, only one team ever wins, and occasionally someone gets kicked in the head. The only difference is that financiers rarely wear very short shorts. And not many get sent off the field for bad behavior.

I’ve said it before, but it bears repeating: the utopian free market doesn’t exist. It can’t exist. It’s based on a mis-interpretation of Adam Smith and what John Cleese might call the blinkered, philistine, pig-ignorance of economists, blithely holding on to abstract concepts that have no relationship to the real world. So we have to stop basing all of our financial decisions on what might happen if those free market fairies really existed, and start basing our decisions on what happens here on Planet Real.

And just like soccer, we can change the rules of our financial systems. This is a particularly good idea since the rules we’ve got now don’t work all that well, unless you’re a squillionaire. The current system has the effect of pumping money from the poor to the rich, and, aside from any moral qualms we might have about that, it means that the economy slows down because nobody’s got any money.

So what can we do? Well, there’s a whole passel of stuff that would help. For starters, some regulation wouldn’t hurt. If bizarre credit derivatives can’t be banned outright, then a variant of the Tobin tax could be applied - a tax on all transactions between institutions in order to discourage the toxic tangle that’s eating the financial system.

It’s also a very good idea to direct some of the bailout billions towards calming the housing crisis in the US. If governmental power and billions of dollars can’t stop people being turfed out of their homes while CEOs ride the cash wave, then it should be blatantly obvious to anyone with more than 3 brain cells to rub together that our economic system no longer serves the common good and should be replaced entire. I’ve got a few suggestions there, which I’ll talk about in coming weeks.

Yes, there’s a certain amount of horse and stable door about this. If we’d been clever, we would have stopped this nonsense before it ate New York, but right now we’re definitely looking at the back end of a fast-moving horse, and at least we might be able to stop some others bolting.

What’s vital at this stage is to accept that our entire economic system is fatally flawed, and to stop trying to put band-aids on a patient that’s spouting blood in a hundred directions. Every single effort by our governments should be towards changing the system, not just propping it up.

I’ll have some more suggestions over the coming weeks, but for now, you can at least start pointing the finger of scorn at free market fundamentalists, and perhaps contacting your representatives to convince them that yet another short-term fix of a fairy-based economy isn’t what we need.

Tagged as: economy, depression, jobs, free market, econopocalypse, free market fairies